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3 Causes of Long-Run Development Authors draw distinction between proximate and fundamental causes Where do the topics we ve covered so far in this course (food, education, health, technology, finance) fit in to this distinction?

4 Fundamental Causes Authors draw distinction between geography and institutions as two candidates for fundamental causes of long-run development. What could go wrong with drawing this distinction? What else might matter for long-run development?

5 Why Might Geography Matter? 1. Montesquieu: Geography affects humans (and their capacity for work, thinking and learning) directly. 2. Sachs: Geography affects other living organisms (plants, diseases, disease vectors...) directly. 3. Diamond: Geography affects the types of technologies (e.g. domesticated animals) that can be used, and these may have long-run consequences (e.g. the agricultural revolution). 4. Diamond: Geography affects ability of humans to migrate. Latitudinally-oriented continents (Eurasia) mean a large migratory range at similar climates (so can take appropriate technology with you, and will face familiar diseases wherever you go). Longitudinally-oriented continents (eg the Americas) are different. Similar argument: a large group of people facing similar environments can take advantage of economies of scale in knowledge-production.

6 But What are Clear Counter-examples to Geography?

7 Do We See Geography at Work Here?

8 Do We See Geography at Work Here? From Paul Romer s Charter Cities blog

9 Geography and the Reversal of Fortune Geography is (largely) persistent. So if geography is a key fundamental determinant of development, development should also be persistent. By contrast, institutions change (and changed big time around colonization, c 1600).

13 Two Important Qustions 1. Is the reversal of fortune necessarily evidence against the geography hypothesis? 2. Is the reversal of fortune necessarily evidence in favor of the institutions hypothesis?

14 Reversal of Fortune Timing Industrial revolution: industry is particularly institution-sensitive (huge up-front costs of innovating and investing) Figure 6 Timing of the Reversal Urbanization in excolonies with low and high urbanization in 1500 (averages weighted within each group by population in 1500) low urbanization in 1500 excolonies high urbanization in 1500 excolonies

16 Colonialization and the Reversal of Fortune I Colonialization was process that changed institutions a great deal. Who created the new institutions? The colonizers. What institutions did they create? (Good or bad?)

17 Colonialization and the Reversal of Fortune II The institutions the colonizers created depended on what was in their own self-interest. Self-interest depended on whether settlers present or not. If settlers: A bit like quasi-democracies back home need to keep the median voter happy. If no settlers: Attempt to extract as much as possible from the colony. Exploit native populations. Coerce labor into slavery. So what determined whether there were settlers or not? Could settlers survive there? Disease, etc. Were settlers needed there? Some resources just needed loads of unskilled labor, and only a few settlers to manage the process.

18 Settler Mortality Thinking in this manner generates another experiment in long-run development: Suppose that whether settlers were killed by the disease environment when they arrived or not (we call this: settler mortality ) was basically random. Then places with high settler mortality should have received fewer settlers, and hence received bad institutions. Then, if (for whatever reason) institutions are persistent (bad institutions beget bad institutions), then these places will have bad institutions today. Then, if bad institutions (PR) are bad for development (Y ), places with high settler mortality (SM) should have low levels of development today. Acemoglu, Johnson and Robinson (2001) pursue this logic empirically.

19 Settler Mortality as an Instrumental Variable We are interested in the question: Does PR cause Y? The correlation between PR and Y is strongly positive. But we are worried that this correlation does not prove causation. Suppose that SM affects PR through the incentives for colonizers to build good institutions (and the fact that institutions are persistent). Suppose further that SM affects Y only because SM affects PR and PR affects Y. Then SM can be used as an instrumental variable for PR in the regression of Y on PR.

24 Application to Development Policy Today? How useful is the geography vs institutions debate for contemporary development policy? How useful is the AJR empirical approach for contemporary development policy? Go back in time and save more settlers? Right the wrongs of past colonial injustice? If institutions matter, what can be done to make them better?

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